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One Market Where Oil Prices Doesn’t Really Matter Much

One Market Where Oil Prices Doesn’t Really Matter Much by Peter Hayes – BlackRock

Peter Hayes tackles a particularly slippery question in the last of our five-week chart series dedicated to the potential advantages of municipal bonds.

In the final of our five-chart series, Feeling Taxed?, we’ll scale a particularly slippery slope. Of course, that’s oil and this question:

Are you worried your portfolio will be affected by the recent slide in energy and oil prices?

I will once again point you to municipal bonds — one asset class that has been largely insulated from the drop in oil. While some states are major oil producers, the impact of oil’s slide has been fairly limited. Texas, the biggest oil producer, is also a big storer of oil — an advantage now given extremely elevated supplies. Many of the other energy-producing states are not large issuers of municipal debt.

And consider this angle: Low oil and gas prices mean more money in consumers’ pockets. To the extent that results in more spending, state coffers would benefit from the increased tax collections (and what’s good for state budgets is generally good for states’ creditworthiness and municipal debt ratings).

At a more granular level, consider that savings at the pump have traditionally resulted in increased tobacco consumption (the logic being that the excess cash is used to fund tobacco habits). We’ve seen evidence of this recently in the performance of corporate vs. municipal high yield. Whereas the energy sector wreaked havoc on corporate high yield last year, tobacco was the best-performing segment of the municipal high yield market. For investors, the key takeaway is that not all high yield is created equal.

Oil bust supports tobacco boon

Oil Prices

Oil Prices

For more of the potential advantages of municipal bonds, check out Feeling Taxed? What You Need to Know About MunisWhen Volatility Taxes Your Patience … and Your PortfolioWhere to Find Decent Income, Without Indecent Risk, and When Home Is Where You Want Your Money to Be.

Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog.